Retirement Withdrawal rates - NYT Article

[chinaco]

This article (and the pod cast - link on the article) provides a nice summary about retirement withdrawal rates.

I thought I would post it for the Newbies that would like a summary.

http://www.nytimes.com/2009/08/29/y...rement-account-iras/29money.html?ref=business

 

[CuppaJoe]

Chinaco's link requires registration with e-mail. I was able to get to page one by googling it. It is a two page story.

 

[W2R]

I guess I must have registered a long time ago - - didn't have any problem seeing the article. What I had a problem with was the article's encouragement to use 5-6% withdrawal rates.

“The only problem is you run out of money? I don’t buy that,” he said. “For a lot of people who lock in on a 4 percent figure, it’s a formula for regret. They get 15 years in and look back at all of the things they didn’t do. And now their health is gone.”

Personally I don't think this is an article for newbies who would like a summary. My perception is that the majority of our current members prefer an SWR of 4% or below, depending on the number of years of withdrawal they have planned.

The article did quote Guyton concerning withdrawal rate, but didn't present the whole picture IMO. I did like the fact that they pointed out that 4% last March wouldn't have been the same as 4% today. That's something to consider. Still, recent market recovery does not magically transform a 4% withdrawal rate today to a 6.5% withdrawal rate last March, at least not in MY portfolio.

 

[LOL!]

Ron Lieber's article about the work of Kitces and Guyton is really for the here and now. Maybe the title of this thread should be "Retirement Withdrawal rate after the market tanks"?

Basically, if one is withdrawing 3% from a retirement portfolio in say 2007 and your portfolio value drops by 50%, then to withdraw the same dollar amount, you have to withdraw 6%. That would be OK if markets recover as they have historically, because you would not be withdrawing 6% for very long as your portfolio recovered.

OTOH, elsewhere Otar writes in his new book, that if the market tanks, you are probably doomed and should continue working for a few years before you retire, so that you can see if your portfolio really does recover. After all, such a major fluctuation in the market could fall into the "unlucky" 10% failure mode. And you don't need that to happen in the first couple of years.

I imagine we will see some articles about 8 to 10 years from now from folks who retired in 2009 after their portfolio tanked. "Everything I read said that I could withdraw 6% back then because it would've been 4% a couple years before. Now I have to move in with the children. Thank goodness Costco has free samples so I don't have to eat cat food."

 

[rescueme]

Any "published fact" that specifies a specific withdrawl rule, at a certain age is foolish, IMHO.

The simple question is how many people retire (as suggested in the article) with all income sources available from the first day of retirement?

Many dual income couples do not stop work at the same time. Also, they do not draw SS at the same time. Throw in possible old pensions that kick in sometime in their mid 60's and possible current/future SPIA income and you find that it is not a straight line withdrawl ratio in the early years of retirement.

Taking my own (and DW's case), we both planned to retire when we turned age 59. I did - my DW didn't (her choice). Our forecast withdrawl rate at that time was at 6%, and this was based upon our portfolio value in early 2007.

That 6% was forecast to increase over the next 11 years (when I would claim my SS) to a bit over 11%. BTW, my wife plans on taking SS early next year, at age 62 (if she actually does retire).

We're in trouble, right? No, not actually. At age 71 (first full year of SS) our joint portfolio withdrawl rate drops to below 4%, and stays there till age 85, only slightly rising in following years (assuming we're still alive).

Retirement is not a static target. Both how you live it, and your projected income (e.g. withdrawl rate) do change, regardless of well placed plans.

BTW, that 6% withdrawl forecast from over 2.5 years ago today is actually 2.5% due to two non-planned for changes. The continued employment of my wife (even at reduced hours) and the purchase of an SPIA with funds from 2007 - before the downturn.

Plans are great, but they are just that - plans ...

 

[W2R]

I imagine we will see some articles about 8 to 10 years from now from folks who retired in 2009 after their portfolio tanked. "Everything I read said that I could withdraw 6% back then because it would've been 4% a couple years before. Now I have to move in with the children. Thank goodness Costco has free samples so I don't have to eat cat food."

I understand it's easier to choke down when smothered in catsup!

I do think your point is very well taken, and is a good reason to go beyond this article and read about withdrawal rates in depth before deciding on one.

 

[walkinwood]

As I go nuts trying to figure out if I should stay ER'd or get back to my old career, or do something in between, I've been reading a lot of these articles & books.

A few obvious things stick out:

- Future market performance may bear no relationship to the past irrespective of ANY rules of thumb out there. But having said that, past performance over long periods is the best guidance there is. A lot of people have pointed out the issues with Monte-Carlo simulations.

- Regret (as Guyton points out in the column) is a real issue. Will I regret the wasted time if I go back to work to prop up a portfolio that may not need it? Will the 'future me' (who I don't profess to know) be unhappy with a lower standard of living if the portfolio depletes faster than expected? The only true solution is to find something your love to do & pays enough. After a year of reflection, this is NOT easy, and I have not been successful at it - yet.

- Inflation / deflation is Personal. I think that's one of the big risks in these studies that use CPI. If there is deflation this year, will your non-discretionary spending also decline? I know mine will not due to increasing property taxes and health care premiums alone! A lot of past-history based scenarios are successful because of the deflation that accompanied the great depression.

I like the "discretionary fund" that Guyton talks about and I have implemented something like it (I'll post the details some other time).

Btw, if you want to see how Guyton's rules would work out, I created this spreadsheet a while ago
http://www.early-retirement.org/for...tions-using-guytons-decision-rules-29684.html

 

[REWahoo]

Walkinwood, I feel your pain. Your (our) financial future is unknowable. My only advice is there comes a time where you have to make a choice and move on. Sitting astraddle a fence is a miserable existence.

 

[shotgunner]

- Regret (as Guyton points out in the column) is a real issue. Will I regret the wasted time if I go back to work to prop up a portfolio that may not need it? Will the 'future me' (who I don't profess to know) be unhappy with a lower standard of living if the portfolio depletes faster than expected? The only true solution is to find something your love to do & pays enough. After a year of reflection, this is NOT easy, and I have not been successful at it - yet.

Walkinwood, we are I think in similiar situations, I E/R'd in April 2008, the next month it turned into semi E/R when my old job made me a 20 hour week flex time offer. I was 52 in April, self funded retirement, buy my own health insurance, HDHP w/HSA.

I was glad to be semi-retired last fall and winter when the sky appeared to be falling, Dam glad. I also learned I enjoyed a little bit of structure that P/T work provided. My old job is far less draining emotionally on a four hour day.

I don't know if my "plan" will work for sure, but I still think it will. My guess is if it doesn't I am going to be one of last people in town to enter the lines waiting for public assistance. Far more people will be "wiped out" before I am.

On the regret side, what if you develop a terminal illness, would you regret having gone back to work or additional time spent at work? Since making the decision to leave full time benefitted work last year 3 high school classmates have died. A friend of 25 years or more who is now 64 retired at 55, he never smoked and is now in stage 4 lung cancer. He is stopped his chemo because he wants to enjoy some of his life now as he had no enjoyment while on chemo.

The way I see it if one is healthy at any age they have some options. Once your health is permantly in decline the ability to enjoy life is severely compromised.

Everyday each of has with good health and freedom of movement, freedom from pain etc. means we have one less good day like that to live. What do you want to do with the one's you have now?

Sorry to be blunt or philosophical, most discussion here surrounds money and material stuff. Time is something even more unknowable and finite for each of us. We can't afford to lose sight of that and I doubt you have or you wouldn't be reading/participating in an E/R forum.

Good luck.

 

[Nords]

I imagine we will see some articles about 8 to 10 years from now from folks who retired in 2009 after their portfolio tanked. "Everything I read said that I could withdraw 6% back then because it would've been 4% a couple years before. Now I have to move in with the children. Thank goodness Costco has free samples so I don't have to eat cat food."

Heck, we can see them now for the Y2K retirees. Look a Raddr's sample, the guy with the 75% S&P500/25% commercial paper portfolio:
Raddr's Early Retirement and Financial Strategy Board :: View topic - Hypothetical Y2K retiree update

In constant 2000 dollars the initial $1M portfolio has eroded to $382K and our retiree is now in a position of having to withdraw over 10% of that amount in order to keep living on a 4%/yr inflation-adjusted withdrawal rate.
I ran a historical comparison on firecalc and found that this portfolio in year 9 has the third lowest balance of any since 1871. Not only that, just as importantly, valuations now are at best only in line with historical norms with regard to PE10 and still overvalued with regard to dividend yield. In the past the portfolios that ran into trouble during the first 9 years could count on low, bargain-basement valuations at the end of the bear market to resuscitate their portfolios. But this is not the case for the hapless Y2K retiree who bought the safety argument for a stock-heavy S&P500-based portfolio in the heady days of the dawning of the new millenium. Clearly, this portfolio is in huge trouble and it would take a miracle to make it the full 30 years before failure.

 

[audreyh1]

What was the bond/stock allocation for that Y2K retiree? I didn't find that. I assume the portfolio was rebalanced after withdrawal each year?

Hmmm - looks like 75% equities? Is the spreadsheet assuming a Y2K retiree retired with 75% in equities?!?!?

Seems like a retiree would be more like 50/50 - I think it might change the example quite a lot!

But then I'm a Y2K retiree, but I haven't made that many withdrawals from my retirement portfolio AND I spent the first 2.5 years averaging into the market from cash.

And, I never increased my withdrawal allowed based on inflation. In fact my yearly expenses have gone down in absolute dollars over the past 10 years.

Audrey

 

[Gone4Good]

The article seems entirely reasonable.

However, although it is true that someone who retired at the market peak with a 4% withdrawal rate would see their WR increase to 6%+ in March 2009, I highly doubt any sensible person would continue pulling 6% out of their portfolio under those circumstances. Similarly, it stands to reason that someone who hasn't yet retired, and is looking at a depleted portfolio, should consider either lowering their planned withdrawals or delaying retirement to avoid a high initial withdrawal rate.

 

[Gone4Good]

In fact my yearly expenses have gone down in absolute dollars over the past 10 years.

Audrey

Quite a feat!

 

[FIREd]

but I haven't made that many withdrawals from my retirement portfolio

How did you manage to pay for living expenses over the past 10 years without withdrawing much money from your retirement portfolio? Do you have a pension? Or perhaps you don't include cash holdings in what you describe as your retirement portfolio and you meant that you had large enough cash reserves to avoid taking much money out of stocks and bonds?

 

[ERD50]

Hmmm - looks like 75% equities? Is the spreadsheet assuming a Y2K retiree retired with 75% in equities?!?!?

Seems like a retiree would be more like 50/50 - I think it might change the example quite a lot!

FIRECALC does not show any difference in success rates between 50% and 75% AA. In fact, 50% is closer to the edge of drop-off in success rates than 75%. That is, 35% EQ has lower success rate than 100% EQ.

Sure, 50% would be better in a downturn, but then you are into Dirty Market Timing country.

 

[audreyh1]

FIRECALC does not show any difference in success rates between 50% and 75% AA. In fact, 50% is closer to the edge of drop-off in success rates than 75%. That is, 35% EQ has lower success rate than 100% EQ.

Sure, 50% would be better in a downturn, but then you are into Dirty Market Timing country.

I KNOW that FIRECALC does not show any difference in success/outcome, HOWEVER there is a huge difference in volatility on the way, and the aftereffects is what that scary spreadsheet is showing. [Of course the spreadsheet is also using the S&P500 as the "equity" allocation - talk about horrible diversification. However I do suspect many retirees believed that using 100% S&P500 index fund for their equity allocation was an OK thing to do. In 1999 I wouldn't have touched an S&P500 Index Fund with a 10 foot pole.]

Why is volatility always glossed over? Short-term volatility really matters to a retiree - higher volatility means less able to sleep at night and more tendency to make self-detrimental knee-jerk investment decisions.

Volatility is why the retiree chooses 50% over 75% for an equity allocation. Yes, it is in anticipation of market downturns in the early years - that is a natural concern. Does that make them dirty market timers? I don't think so. I think it is simply prudence.

Certainly as a 1999 retiree I was concerned about market volatility in the near term, and for that reason I was pretty conservative in my initial equity allocation of 60% even though the portfolio survival studies implied that 70% would be better. I just didn't think I could live with the volatility. The older I get, the lower the equity allocation simply because I have less time that I need to beat inflation.

Basically my point of view was - what is the minimum equity allocation I can get away with and still have a long portfolio survival over inflation? I went with 60% equities due to my young age, but I also went with a lower than 4% withdrawal rate with NO indexing to inflation.

Audrey

 

[audreyh1]

How did you manage to pay for living expenses over the past 10 years without withdrawing much money from your retirement portfolio? Do you have a pension? Or perhaps you don't include cash holdings in what you describe as your retirement portfolio and you meant that you had large enough cash reserves to avoid taking much money out of stocks and bonds?

I started with a very well padded short-term cash fund, and I had other, much riskier assets (that could have gone to zero at any time) that I have been able to draw on most of the time.

I'll explain more in another post.

Audrey

 

[audreyh1]

Originally Posted by audreyh1:
In fact my yearly expenses have gone down in absolute dollars over the past 10 years.

Audrey

Quite a feat!

Don't know about that! I think we just did all the expensive things early on!

Audrey

 

[ERD50]

Why is volatility always glossed over? Short-term volatility really matters to a retiree - higher volatility means less able to sleep at night and more tendency to make self-detrimental knee-jerk investment decisions.

Volatility is why the retiree chooses 50% over 75% for an equity allocation. Yes, it is in anticipation of market downturns in the early years - that is a natural concern.

I don't think there is anything at all wrong with someone choosing a 50/50 AA. It's just that your post with the "?!?!?" regarding a 75% Equity AA seemed to imply that you thought 75% was in "crazy territory". I was just pointing out that long term, it does not seem crazy at all. I'm not glossing over volatility, but I think long term volatility really matters to a retiree, too. Long term volatility is reflected in the success rate reported by FIRECALC.

I went with 60% equities due to my young age, but I also went with a lower than 4% withdrawal rate with NO indexing to inflation.

Audrey

OK, now I'm really curious. How does one retire at a young age, and determine that they won't need to adjust their withdrawal rate for inflation?

-ERD50

 

[audreyh1]

I don't think there is anything at all wrong with someone choosing a 50/50 AA. It's just that your post with the "?!?!?" regarding a 75% Equity AA seemed to imply that you thought 75% was in "crazy territory". I was just pointing out that long term, it does not seem crazy at all. I'm not glossing over volatility, but I think long term volatility really matters to a retiree, too. Long term volatility is reflected in the success rate reported by FIRECALC.

It seems to me that if there is a range of AAs that give about the same long-term success/result/volatility, a prudent older retiree is going to choose the AA that provides the lower short-term volatility too. Sorry, but I still see 75% equity exposure as "crazy". That's my gut speaking and it is stubborn.

OK, now I'm really curious. How does one retire at a young age, and determine that they won't need to adjust their withdrawal rate for inflation?

-ERD50

By limiting withdrawals to no more than 4% each year based on current portfolio value - not using some initial portfolio value. Over time, you would expect that to keep up with inflation, but over a shorter period you might have to deal with less money than the prior year.

Audrey

 

[Radiophilejapan]

... The only true solution is to find something your love to do & pays enough. After a year of reflection, this is NOT easy, and I have not been successful at it - yet.

This is my dilemma today: Keep working another 2 or 3 years for megacorp to amass enough for a decent SWR, or FiRE rigth away and find something I love to do at a far lower pay but over the rest of my able life. I'd invest a few years of retraining or just reflecting to find the activities with the best balance of loving to do vs pay.

 

[ERD50]

re: no inflation adjustment on withdrawals...

By limiting withdrawals to no more than 4% each year based on current portfolio value - not using some initial portfolio value. Over time, you would expect that to keep up with inflation, but over a shorter period you might have to deal with less money than the prior year.

Audrey

OK, gotcha. I just played with that " % of remaining portfolio" option in FIRECALC - a little hard to do apples-to-apples since "failure" is undefined. Back in this post:

http://www.early-retirement.org/forums/showpost.php?p=845427&postcount=72

I mentioned that I think that people with the variable spending plans may be underestimating just how much they might need to cut back, even with a conservative portfolio. Maybe later I'll try some comparisons runs, I'm curious what AA ranges would do for those.


-ERD50

 

[audreyh1]

Yes, I think I've had that conversation before. However, since I my actual spending is already well under what my investments support as a SWR anyway, I don't really worry about it.

I have just never liked the concept of blindly taking a fixed initial value % + inflation adjustment each year. I prefer to be much more responsive to the current value of the portfolio.

Audrey

 

[chinaco]

The 4% rule (or pick your % around that figure +/-) is a rough guideline for a certain period of time (duration of withdrawal). This value helps people to plan an expected income and provides target (income/expense) amounts to try to manage. It is probably as good as it gets in terms of having a view of the future.

I like the PE10 research because it provides some insight about how to judge the WR in good or bad times.

There are so many complex variables (you, the market, your choices, etc)... all one can do is set a reasonable plan, execute and adjust as needed.

Prudent action would be to adjust along the way if your situation changes fundamentally. The event that causes you to adjust could be something other than market returns (e.g., a life event).

Of course, this is no different than when one is working... but many do not realize it until they lose their job.

 

[Rich_by_the_Bay]

I mentioned that I think that people with the variable spending plans may be underestimating just how much they might need to cut back, even with a conservative portfolio.

Clyatt tested this for his book and concluded that you can limit any year's withdrawal reduction to 95% of the previous year's withdrawal and still come out OK. It is true that you are likely going to face a little belt-tightening on the variable plan, but it's comforting to know that a 95% floor is the worst compromise you'll probably have to make.

Of course that also allows for years which are 10% or more greater than your previous annual withdrawal. I'd guess that a lot of adherents tuck away at least some of those "bonuses" doing your own kind of income smoothing.